USD/ZAR forecast: Rand weakness to persist ahead of SARB decision

The South African rand has retreated in the past two months, erasing some of the gains made a few months ago. The USD/ZAR exchange rate was trading at 18.05 on Wednesday, up by over 6% from its lowest point level this year.

South Africa’s interest rate decision ahead

The USD/ZAR exchange rate will be in the spotlight as the South African central bank delivers its interest rate decision on Thursday.

Economists expect the bank to cut interest rates for the second consecutive meeting. If this is correct, the bank will slash rates by 0.25% to 7.75% from the current 8.0%. Before that, it slashed rates from 8.25% in the last meeting in September.

The central bank hopes that these cuts will help to supercharge an economy that has shown signs of resilience in the past few months.

It is also motivated by the fact that inflation has continued its downward trend in the past few months. The headline Consumer Price Index (CPI) has retreated to 3.8%, down from the 2022 high of 7.8%. This means that the figure has moved below the bank’s target rate.

Core inflation, which excludes the volatile food and energy products, also retreated to 4.1 in September, down from 5.2% in 2022. 

The SARB decision will come a day after the statistics agency releases the October inflation numbers. 

Hopes of SARB rate cuts have pushed government bond yields lower. Data by TradingView shows that the ten-year yield dropped to 9.10%, down from this month’s high of 9.50%. The five-year yield has also dropped to 8.26% from this month’s high of 8.52%. 

South Africa’s economic outlook raised

The SARB meeting also comes as global agencies recognised South Africa’s economic resurgence. Just this week, S&P Global raised its outlook for the economy to positive from stable for the second time in the past six years. This means that the agency may soon opt to boost South Africa’s credit rating.

Recent data show that investors and analysts welcome the ongoing reforms being made by Cyril Ramaphosa, who won reelection and formed a government of national unity. Some of the reforms have been on the energy sector, where the frequency of load shedding has eased. He has also launched Operation Vulindlela which aims to improve infrastructure.

A key challenge for the South African economy is the recent US election of Donald Trump, who has promised to implement tariffs. It is unclear whether South Africa will be impacted. Data shows that the US imported goods worth $14.6 billion from South Africa in 2022 and exported goods worth $6.5 billion.

The next key catalyst for the USD/ZAR pair will be the actions by the Federal Reserve, which has hinted that it will go slow on interest rates cuts in the coming months.

USD/ZAR technical analysis

The daily chart shows that the USD to ZAR exchange rate bottomed at 17.05, its lowest level on October 1.

It has now moved above the upper side of the descending channel shown in blue. Also, it has formed a break and retest pattern by moving back to the upper side of the channel. This is one of the most popular continuation patterns in the market.

The pair has moved above the 50-day and 100-day Exponential Moving Averages (EMA). Also, the Relative Strength Index (RSI) has drifted downwards. 

Therefore, the USD/ZAR pair will likely continue rising as bulls target this month’s high of 18.40. A break above that level will point to more gains, with the next point to watch being at 18.68, its highest point on August 5.

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